How to save globalisation from its demise

Stephen Roach says governments must wake up to the need for effective safety-net programmes to support workers who have been left behind, or suffer the consequences of a backlash against globlisation and free trade

PUBLISHED : Saturday, 30 July, 2016, 12:31pm
UPDATED : Saturday, 30 July, 2016, 6:44pm

While seemingly elegant in theory, globalisation suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect.

Truth be known, there is no rigorous theory of globalisation. The best that economists can offer is David Ricardo’s early 19th-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade. Trade liberalisation – the elixir of globalisation – promises benefits for all.

That promise arguably holds in the long run, but a far tougher reality check invariably occurs in the short run. Brexit – the United Kingdom’s withdrawal from the European Union – is just the latest case in point. Voters in the UK objected to several of the key premises of regional integration: free labour mobility and seemingly open-ended immigration, regulation by supranational authorities in Brussels, and currency union. Economic integration and globalisation are not exactly the same thing, but they rest on the same Ricardian principles of trade liberalisation – principles that are falling on deaf ears in the political arena.

After Brexit, the coming clash over globalisation

In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’ primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalisation, economic pressures on a beleaguered middle class contradict the core promises of globalisation.

As is often the case – and particularly in a presidential election year – America’s politicians resort to the blame game . Trump has singled out China and Mexico, and Sanders’ opposition to the Trans-Pacific Partnership has pushed Hillary Clinton, the Democratic Party’s nominee, to adopt a similar stance.

Sadly, the economics profession has failed to grasp the inherent problems with globalisation

In short, globalisation has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out.

Nor is it just a problem with an antiquated theory. Recent trends in global trade are also flashing warning signs. According to the International Monetary Fund, annual growth in the volume of world trade has averaged just 3 per cent over the 2009-2016 period – half the 6 per cent rate from 1980 to 2008. This reflects not only the recession, but also an unusually anaemic recovery. With world trade shifting to a decidedly lower trajectory, political resistance to globalisation has only intensified.

Of course, this isn’t the first time that globalisation has run into trouble. Globalisation 1.0 – the surge in global trade and international capital flows that occurred in the late 19th and early 20th centuries – met its demise between the first world war and the Great Depression. Global trade fell by some 60 per cent from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as America’s infamous Smoot-Hawley Tariff Act of 1930.

How China exemplifies the double edged sword of globalisation

But the stakes may be greater if today’s more powerful globalisation were to meet a similar fate. In contrast to Globalisation 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalisation 2.0 is far broader, including growing trade in many so-called intangibles – once non-tradeable services.

Sadly, the economics profession has failed to grasp the inherent problems with globalisation. In fixating on an antiquated theory, they have all but ignored the here and now of a mounting worker backlash. Yet the breadth and speed of Globalisation 2.0 demand new approaches to cushion the blows of this disruption.

Unfortunately, safety-net programmes to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage.

The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalisation 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers, and longer-duration unemployment benefits.

As history cautions, the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen. It is up to those of us who defend free trade and globalisation to prevent that, by offering concrete solutions that address the very real problems that now afflict so many workers.

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate